Fixed Index Annuities - Pros and Cons
Anytime the market's gyrating a little bit, and now that COVID is lifted a little bit, you're starting to get those invitations in the mail to go to the local, very nice, high-end restaurant to have the steak dinner and then hear a sales pitch on the scariness of the markets. That's an indexed annuity sales pitch you’re ready to swallow.
Pros of FIAs
Let's talk about the pros of Fixed Indexed Annuities. They were put on the planet in 1995 as a very efficient solution for CD-type returns and normal CD-type returns. The ones that we're typically aware of, and we're talking about two to 4% ish. Okay? Principle protected, that's a positive. You're never going to lose a penny. Another pro of an index annuity is the index options strategies. The bottom line is they lock in permanently. So on the contract anniversary date, it will lock in permanently if you do have a gain. That's fantastic. Another pro of index annuities, you can attach an income rider at the time of application for a lifetime income stream in the future. You can set it up for yourself or joint with a spouse.
In addition, another pro of index annuities would be these income riders sometimes come with what's called confinement care or enhanced benefits to them. If you need specific in-home or nursing home care, and there are specific rules, I don't want to get in the weeds with that; those are guaranteed issues and can be attached to the income rider. So there are some great things, some great pros about indexed annuities. But here's the problem, those are always overshadowed by the cons, and the cons and the negatives are somewhat self-inflicted in the annuity industry. Most of the negatives with index annuities revolve around an overhyped or borderline fraudulent and misleading sales pitch.
Most of the time, with index annuity sales pitches with agents that just sell that, or they're just pitching that, they're saying stuff like market upside with no downside or market participation with principle protection. That's absolute garbage. They were not put on the planet for market returns. Index annuities are not securities. They're life insurance products issued and approved at the state level. There's no SEC oversight into selling an index annuity. At the time of this taping, you have to pass a state life insurance exam and, I think, score 70. I was just doing a podcast recently with a very smart gentleman; I think one of the smartest people in the annuity industry. His name is John Olsen.
Cons of FIAs
His comment was he believes there needs to be separate licensure and testing to sell index annuities. I completely and 100% agree with him. Now, the other part about the negatives, I hate to say the word cons, let's just say negatives, the negatives about index annuities is the sales pitch goes something like this. Currently, at the time of this taping, a couple of companies are offering 25% upfront bonuses for signing the paperwork. Let's just stop there. Let me just explain that. There are a hundred pennies in the dollar. There are no philanthropists at annuity companies. That's not free money. It's just priced in. Take this the right way or the wrong way; I don't care. Index annuity upfront bonuses are candy for the stupid. If you're that stupid to believe and buy an annuity for the upfront bonus, then you deserve it.
The negatives of index annuities revolve around the sales pitches and the lack of explanation by the advisor or the agent.
You deserve what you're getting ready to get, which is none of the promised promises. If I went to a car dealership and walked in, the guy said, "I want to show you this car." I'm like, "Yeah, great. Show it to me." Look at this stereo. Look at this. It's got 17 speakers, and it turns out... It's loud. I'm like, "I'll take it." Take what? I'm going to take the car. I'm going to buy... Buying an annuity for a bonus is like buying a car for a stereo system. It's stupid. But many agents will talk about upfront bonuses and then combine them with the market outside with no downside, which is not true. They'll just keep going. And then they'll show you back-tested numbers. That's another negative.
Another negative that drives me crazy is agents and advisors will say, "Well, if you'd owned this specific index annuity in the last ten years, you'd have gotten this." That's garbage. And in some states, it's illegal even to do that. It should be illegal in all states because things were different when those annuities were priced. And even better, some of the indices sold now weren't even around ten years ago. Even though they're saying, "Well, if you owned it ten years ago." Wait a minute; the index has only been around six months; how could that be? So there's a lot of bait and switch. There's a lot of misinformation. There are a lot of 30,000-foot view sales pitches without getting into the weeds with index annuities. Notice that I'm not talking... The product, which is the pros of index annuities, they're good. The negatives of index annuities revolve around the sales pitches and the lack of explanation by the advisor or the agent. As I always tell people, if you cannot explain the product you're buying to a nine-year-old, then don't buy it—no offense to nine-year-olds.
I got a call the other day. Gentlemen put half a million dollars in an index annuity. And I'm not going to go into the company. It doesn't matter; they’re all designed to produce the same return rate. I said, "Can you explain the index annuity to me? Can you explain how the call in all options works? Can you explain how they change the rules every year? Can you explain the income rider fee? Can you explain any of that?" He could not. He put half a million dollars into something he could not explain. You can't do that. And if you're talking to me and we're talking about index annuities, and I don't feel like you fully understand it, I'm not going to allow you to sign the paperwork. Don't believe me, try me.
Index annuities are good products. They're not too good to be true, but they're pretty good if you fully understand them and how they work. But that's where the rubber meets the road. So the pros are, again, the positives of index annuities are good; principle protection, locked-in gains, and you can attach income riders for pension needs. And some of those income riders come with guaranteed confinement care enhanced benefits. Hey, that's fantastic, right? Principle protection in a crazy world. But the negatives revolve around the sales pitches. And the problem with that index annuity is that people know they can sell you on fear, and they can sell you on greed. They can either scare you into it or greed you into it. Just don't be that person. You're smarter than that. Don't fall for that.
My Plea to the Industry
Here's my soapbox plea to the annuity industry. Because agents must mean well, they just don't understand what they're selling and haven’t researched what they're selling. And me and John Olsen on the podcast, we're talking about that, that most agents have never, they just don't understand what they're selling. They're selling the 30,000-foot view. But let's put the agents and advisors aside for a while. I'm speaking to the annuity industry. That's who I'm pointing at right now. All your carriers, he NAIC, everybody, here's my plea. I'm on your side and am making this easier for you, but I need you to make it easier for the consumer.
I need you to force the carriers to create index annuities that are simplistic that are easy to understand, okay? When the person gets the policy in the mail, they can read and understand it. Strip it down, strip all the whistles and bells out of that. Make the index annuity story a simple one, an easy one that everyone can understand. Please do that. I mean, you're talking about a no-brainer from an industry standpoint, a no-brainer from a sales standpoint, and a no-brainer from a marketing standpoint is to make things simple. As we all know, Steve Jobs, the former CEO and head of Apple who passed away, said something that applies to the annuity industry, "Simple is complex." It's very complex to make things simple.
What I write and what I say on video and podcasts are simple. The calculators are simple. We're trying to make it simple so people can make good decisions. I hope that the annuity industry makes these products simple because if you don't, it's going to come back to bite the industry. From a pro-customer standpoint, the Fixed Index Annuity story is a good story. It's a principle protection story. It's better than a CD-type return story. It's a lifetime income guarantee with a pension story. It's a good story.
And it's a story that fits in many people's world, with 10,000 baby boomers hitting age 65 every day. Here's the thing. Let's make that story simple and easy to understand. It sounds simple, but for whatever reason, it's not.
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